BUSINESS ETHICS PERSPECTIVE
Good Faith and the Nuclear Condition Option
Note that while the law imposes a good faith requirement on all contracting parties, as a practical matter the law may also protect those who are ostensibly acting in good faith but may have unethical motives. In some contracts, the parties agree to a conditional clause sometimes known as a nuclear condition, that is, a clause whereby one party may cancel the contract completely if a condition is not met to that party’s subjective satisfaction. Consider the case in which the president of Widget Co assigns Manager to purchase a piece of real estate. Manager enters a contract with Owner for the sale of a piece of commercial real estate. Manager insists that the contract contain an “acceptable financing” clause as follows: “As a specific condition precedent to Widget Co’s obligation to close, the parties agree that Widget Co must obtain financing for the transaction on terms and conditions acceptable to Widget Co in Widget Co’s sole discretion.””
After entering into the agreement with Owner, the president notifies Manager that Widget Co is no longer interested in the property and that Manager is to use all “legal means” necessary to break the contract with Owner. Assume that Manager also learns that Widget Co is able to obtain financing on extremely favorable terms according to industry standards.
1. Given that the contract requires that any financing terms must be acceptable to Widget Co, what are Manager’s legal obligations to go through with the transaction? Does this differ from Manager’s ethical obligations?
2. Is it possible for Manager to comply with the good faith requirement and still avoid the contract with Owner?
3. Recall the discussion of ethical decision-making models in Chapter 5, “Business Ethics, Corporate Social Responsibility, and Law.” How could these models help guide Manager’s course of action?
4. Assume that the president orders Manager to lie on the loan application, thereby ensuring that any financial institution will reject the loan application. Note that lying on a bank loan application is a crime. What are Manager’s options at that point?
5. Is this a case where using the nuclear option is simply a good, hard-nosed business practice? Are there any circumstances you could articulate under which Manager has no legal obligation but does have an ethical obligation to Owner?
